ICRA has assigned the rating of AA- with ‘stable' outlook to the Rs 5 billion non convertible debenture programme (NCD) and Rs. 5 billion subordinate debt programme of Muthoot Finance (MFL). ICRA has an outstanding rating of AA- (stable) to the various non convertible debentures, subordinate debt programme and long term bank borrowings of the company and a rating outstanding of A1+ to the short term fund based limits and commercial paper programme of the company.
The ratings of MFL continues to factor in the company's established franchise, its strong branch network, its promoters knowledge of operating in the niche gold loan business segment and its established systems which have enabled it to maintain profitable operations while managing the risks. ICRA has taken note of the mobilization of Rs 4.18 billion of equity by the company through an institutional private placement in April 2014; reported Tier 1 capital of the company as on Dec. 31, 2013 was 17.0%, which after including the fresh equity mobilized would increase to a comfortable 18.7%. While enhanced capital base and good internal capital generation will give MFL the flexibility to grow at ~15-25% annualized rate without adversely impacting the capital structure, ability of the company to mobilize funds to replace the retail debentures and to maintain adequate collateral covers would remain key rating sensitivity.
ICRA notes that MFL has been able to recommence its retail fund mobilization, which had been impacted by RBI July 2013 guidelines for private placements, through issuance of public issue of debentures. ICRA expects liquidity profile of the company to remain comfortable, backed by the short tenured nature of gold loans and large un-utilized bank lines of over Rs 50 billion Although LTV mix of MFL has improved (share of high loan-to-value (LTV) contracts has declined to 20% of outstanding loan portfolio in Mar-14 against 61% in Apr-13), it could increase from current levels, should gold prices fall, as the company has increased its LTVs by 4-5% following relaxation in LTV norms by RBI in January, 2014. Nevertheless, demonstrated ability of MFL through auctions (MFL auctioned around 11% of opening portfolio in 2013-14) without any loss on principal and moderate leveraging are likely to protect the investors in a stress scenario.
Earnings of MFL could improve in 2014-15, in light of the healthy incremental NIMs of the company, and the improved growth prospects, enhanced lender comfort and financial flexibility of the company following the stabilization of regulatory environment. Although, requirement under revised MCA rules chapter 4 for investments in G-Sec/ Bank FDs against maturing debentures in a year will reduce ROA marginally over the short term medium term. The rating remains constrained due to the concentration of company's business to Gold loans, its lack of diversification in its earnings, its marginal borrower profile, exposure to market and operational risk associated with large cash handling spread across 4,260 branches and 57.73 lakh loans as of December-13.
